Evidence of a shift in the short-run price elasticity of gasoline demand

Abstract

Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security. The short-runprice and income elasticities of gasoline demand in the United States during the 1970s and 1980s have been studied extensively. However, transportation analysts have hypothesized that behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. We compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably: and rangefrom - 0.034 to - 0.077 during 2001 to 2006, versus - 0.21 to - 0.34 for 1975 to 1980. The estimated short-run income elasticities range from 0.21 to 0.75 and when estimated with the same models are not significantly different between the two periods. Copyright © 2008 by the IAEE. All rights reserved.